BlueScope Steel Limited (BLSFF) Q2 2024 Earnings Call Transcript

BlueScope Steel Limited (OTCPK:BLSFF) Q2 2024 Results Conference Call February 18, 2024 6:00 PM ET

Company Participants

Mark Vassella – CEO

David Fallu – CFO

Conference Call Participants

Simon Thackray – Jefferies

Lee Power – UBS

Rohan Gallagher – Jarden Group

Peter Steyn – Macquarie

Paul Young – Goldman Sachs

Lyndon Fagan – JPMorgan

Daniel Kang – CLSA

Paul McTaggart – Citigroup

Chen Jiang – Bank of America

Mark Vassella

Good morning, and welcome to the BlueScope First Half FY ’24 Financial Results Presentation. I’m Mark Vassella, and I’m joined this morning by David Fallu for his first results presentation as BlueScope CFO. Welcome, David.

In a moment, we’ll take you through the results before we take your questions. David and I are joining you today from Melbourne, part of the Eastern Kulin Nation, and I’d like to acknowledge the traditional custodians of this land, the Wurundjeri peoples. We pay our respects to elders past, present and emerging and to all First Nations peoples joining us today.

Before we get into the details, I’d like to take a step back and put the first half FY ’24 result into the context of BlueScope’s business model. The last decade has seen us take action to drive resilience in our business model, resilience that allows us to deliver results through all points of the cycle. As we know, recent years have been marked by cyclically higher demand levels and spreads resulting in very strong results. Current volatility is showing softer conditions. However, it is also helping prove the resilience that we know exists in the business. That resilience is underpinned by our diversification, with quality steelmaking businesses and a suite of margin-enhancing premium branded products in the United States, Australia, New Zealand and throughout Asia.

Our footprint of quality assets and the strength of our balance sheet are the key enablers for our through-cycle performance, all supported by our 16,500 strong dedicated team. On bench strength in the organization, recent changes at the ELT are setting us up well to continue to deliver on our strategy with high-quality executives such as David and Sam Charmand joining us. Our next-generation leaders in Tania, Kristie and Peter are relishing their new roles. And Mark Scicluna, who you met at the last half, has joined Kristie as CFO in America. I’m very fortunate to be surrounded by such management talent and depth.

What is exciting and quite unique is the scale of the growth opportunities available to BlueScope within its core business. We’re progressing a range of projects in this space to drive improved margins, volumes and resilience, all leveraging our core capabilities. And we’re securing our longer-term future with our comprehensive decarbonization program and broader approach to sustainability, all in pursuit of our purpose and our bond.

Getting into the detail, BlueScope again performed well in the first half of FY ’24 against what was a volatile backdrop. As I just noted, the result demonstrates the through-cycle resilience of our diversified business model, which also saw us retain a strong balance sheet and continue to deliver returns to shareholders. Aligned with our strategy of transform, grow and deliver, first half FY ’24 saw key projects executed across the footprint that secure our long-term sustainable earnings and growth. These include the North Star ramp-up and debottlenecking, integration of the new U.S. recycling and coil painting businesses, the Port Kembla reline and Western Sydney metal coating line, all of which underpin our future resilience and success.

Our strategy to shift volumes towards premium branded products continues to enhance through-cycle margins enabled by our experience in producing high-quality, premium branded steel building products for over half a century. Leveraging this capability, we’re exploring the opportunity to further integrate our U.S. value chain, building a platform for future growth in coated and painted products in that large and growing market. And lastly, we’re progressing a body of work aimed at unlocking our significant portfolio of land in Australia and New Zealand, an exciting multi-decade opportunity. The commitment we made to decarbonization several years ago is allowing us to explore a pathway that positions the business for a low carbon future.

Two significant highlights in the half were, the recently announced partnership, BHP and Rio Tinto, which builds on a body of work we’ve been undertaking for a couple of years now, work that’s critical to the development of low emissions iron-making technologies utilizing hematite ores. And in New Zealand, the Landmark EAF project to almost halve our emissions has commenced and is progressing well. This is an exciting time for BlueScope as we reap the rewards of the hard work done in years gone by and continue to lay the foundations for the future.

But first to safety. Our integrated health, safety and environment strategy continued in the half, especially as we progress the rollout of our culture and approach to our recently acquired businesses in the United States. We were proud to be recognized by worldsteel for our integrated strategy, and we played a key role as the founding sponsor of the Global Safety Innovation Summit held in Wollongong just last week, which brought leading companies and experts together to further our collective efforts to keep our people safe.

To the lead indicators, we identified 271 risk control projects for completion in FY ’24, all of which will improve our management of material risks and reduce the likelihood of life-changing events. At the end of the half, over 1,800 of our leaders have participated in global HSE risk management programs and 374 of our people were involved in business-led learning programs. On our lagging metrics, with the inclusion of the recent scrap and coil painting acquisitions, TRIFR increased marginally to 7.6, above the top end of the long-term range of 5 to 7, and potential severity saw an increase with 7 injuries having the potential to be a fatal incident. We continue to work hard to improve our safety performance.

To our financial highlights. Underlying EBIT in first half FY ’24 came in slightly ahead of our guidance range at $718 million and broadly in line with the second half of FY ’23, despite some wild swings in steel spreads and macroeconomic drivers, again, demonstrating the benefit of our diversified model. The business delivered a return on capital of 13.4%, and the balance sheet remains strong with net cash of $614 million. The strength of our balance sheet and cash generation underpins our confidence to continue to pursue key investments through the steel industry cycle. And the Board today has approved a fully franked interim dividend of $0.25 per share and an increase in the buyback to $400 million to be bought back over the coming 12 months. Now this result has been made possible by the dedication of our 16,500 strong team, who I’d like to thank for their ongoing dedication and support.

David will take you through the detailed business performance, but you can again see the significant contribution from North America. As I look across these regional results, I’m encouraged by the earnings power of the business and excited by the opportunities for growth within our core business. The business continues to pursue our purpose and deliver on our bond as we embed sustainability in all that we do. On climate, highlights include the progress on our DRI Options Study, deepening of our technology collaborations with leading global steelmakers and progress on our optimization projects in pursuit of our medium-term goals. Female representation continues to be a key focus as we progress initiatives to better reflect the communities in which we operate. We’ve seen solid improvement over the last few years, and the total percentage of women in BlueScope’s workforce remained stable at 24% in the first half.

On sustainable supply chain, just under 150 assessments were completed during the half with 4 on-site audits conducted. And as previously flagged, BlueScope has appealed the findings made by the Federal Court in relation to the civil proceeding bought by the ACCC. The payment of the penalty has been made and is reflected in our accounts. As I mentioned earlier, just a week or so ago, we signed an agreement with Rio Tinto and BHP to collaborate on a project that aims to accelerate the decarbonization of steelmaking. We’ve agreed to work together to develop a pilot facility focused on direct reduced iron and electric smelting technology, leveraging the natural advantages of Australia, namely our hematite iron ore resources and the potential for abundant renewable energy. Those of you who are familiar with our climate and sustainability reporting will know that a hydrogen DRI process has the potential to reduce emissions intensity by over 80%.

However, this requires a number of enablers to be in place. Given the current limitations of using Pilbara ores in the DRI process, this project is key to unlocking one of those enablers by cracking the code for Pilbara ores in low-emission intensity ironmaking. We’re excited to contribute our unique experience of operating the only electric smelting furnace processing DRI in the world at our operations in New Zealand, which we’ve been doing for nearly 60 years. I’m also pleased to report work on the EAF at New Zealand Steel is underway. Cofounded by the New Zealand government, this project will almost halve the business’s emissions and contribute meaningfully to New Zealand’s emissions reduction. Construction equipment supply contracts have commenced and importantly, a domestic scrap supply chain is in place.

The Rio Tinto BHP agreement and the New Zealand EAF project are just 2 examples of how we’re pursuing our purpose and our strategy. We’re also transforming our business through the increased use of digital technology. We’re only just starting to see the benefits of the growth investments that we’ve made in recent years, and they’re adding to our earnings profile. And we remain focused on delivering a safe workplace and an adaptable organization with strong returns. To update the key projects in North America. The North Star expansion is progressing well, with 320,000 extra tons produced during the half, and we’re now looking to the debottlenecking opportunities. The recycling business has exceeded our expectations, delivering significant value to the North Star business. Through sophisticated value-in-use assessments, BRM and North Star can optimize the quality and mix of scrap.

We continue to work towards a greater level of self-sufficiency through a range of equipment and digital opportunities. At BlueScope Coated Products, the acquisition of 7 underutilized paint lines for below replacement costs has accelerated the execution of and provided options for our U.S. coated and painted strategy. A program of work is underway to address near-term underutilization in the business and to progress the single-bill offer and COLORBOND market strategy. Now whilst the business we acquired is not performing as we’d hoped, we remain confident of the medium- to longer-term growth opportunity these assets give us. Expanding on this medium to longer-term opportunity, we’ve commenced the feasibility study into the further integration of our U.S. value chain. As our U.S. footprint covers each end of the value chain, with hot-rolled at North Star and painted coil at BCP’s paint lines, the opportunity exists for cold rolling and metal coating.

Our study is focused on a cold rolling and metal coating facility in the Midwest, providing a reliable supply of high-quality metal coated feed, which will be critical in delivering our U.S. growth ambitions as we take our core DNA in coating and painting into the large and growing U.S. market. We’re initially looking at the addition of 550,000 tons of pickling, cold rolling and a 2-stage metal coating capacity add to be delivered through 2030. This approach allows us the ability to grow in a modular fashion and maintain optionality. A high-level capital estimate for the total project is up to USD 1.2 billion, which would be spread over the next 6 years should the project be fully executed.

To the key projects in Australia and New Zealand. Having moved to execution last August, the #6 blast furnace reline and upgrade project to secure ironmaking at Port Kembla is progressing to plan with early works commenced and long lead time items advanced. Project timing and capital estimates remain on budget, noting the recent award of $140 million from the Australian government to provide some offset to the total cost. And the new metal coating line in Western Sydney is progressing to plan. We’re expecting commissioning by the end of 2025, which supports the ongoing shift towards premium branded products in Australia.

An enduring initiative in Australia has been the continued shift in production towards premium branded products like COLORBOND and value-adding solutions like TRUECORE. This growth delivers enhanced margins for the ASP business, reducing our exposure to export markets and domestic commodity pricing and remains a key through-cycle growth opportunity. The shift towards these premium products has grown at levels in excess of the broader market, which has been achieved through meeting customer demand preferences, leveraging the inherent attributes and advantages of our products, continued efforts to innovate and increase the applicability of our products across building applications such as cladding, facades and light gauge framing, and investment in customer-centric initiatives that have driven demand through the steel value chain.

What’s most exciting is that the strong growth seen in this space is expected to continue with the success of our ongoing efforts enhanced by a range of supportive macro trends. At our AGM in November last year, we shared with you an update on the master planning work for roughly 200 hectares of land adjacent to the Port Kembla Steelworks. In addition to this land, BlueScope has 3 other plots of adjacent land holdings totaling 1,200 hectares.

This includes around 450 hectares of land adjacent to our Western port facility in Victoria, approximately 400 hectares adjacent to our Glenbrook site in New Zealand, and a 200-hectare parcel of land, not far from Port Kembla in West Dapto. This represents a significant opportunity for BlueScope. We’re reviewing this opportunity to position the land for maximum strategic value. This includes running master planning processes with due consideration to our existing operations and looking at potential uses and related planning requirements, noting a broad range of opportunities existing across each parcel. And we’re progressing a body of work focused on developing our execution model, which will be centrally coordinated in the corporate function.

I’ll now hand over to David, who will take you through the more detailed financial data.

David Fallu

Thanks, Mark, and good morning, everyone, and it’s been great working with the teams across the business over the last half.

So let’s turn to the results on Slide 20. The Australian business delivered a similar result to the second half of FY ’23, with underlying EBIT of $258 million. Underlying demand remains robust, including for COLORBOND. However, softer volumes were observed towards the end of the half. Pleasingly, January and February daily sales remained stable at consistent levels to a year ago. Higher spreads were largely offset by higher costs on timing of maintenance and escalation pressures with a similar export coke performance to that of the prior half.

Looking at specific and new segments for ASP. Across the board, we saw slightly softer dispatches in the first half of FY ’24 relative to the prior half, which was observed broadly towards the end of the half. Sales into the residential construction sector remains supported by a solid pipeline of work during the half. Nonresidential construction, manufacturing, agriculture and mining were the sectors that drove a slightly lower result, which was experienced towards the end of the half. Given current Asian steel spread levels are at a historically low level, I thought it was important that we take a step back to look at the cost and margin position the business is in, given we’re now 8 years on from the major restructure through FY ’15 to FY ’16.

After resetting the steelmaking cost base to be cash breakeven, including sustaining CapEx at the bottom of the cycle, the business has done an excellent job at maintaining this position despite a high inflationary environment. I do note that the shift towards premium branded products has increased costs. However, we need to keep in mind this has been more than offset by increased revenue and therefore, enhancing margins. The combination of both these dynamics is that the margin reset has been maintained at the higher level, which materially improves the downside risks, even at points below the historic bottom of the cycle. You can see this clearly on the analysis set out on the chart on the right-hand side of Slide 22. We are confident that we’ll be able to have ASP continue to position itself in the upper band of this chart, and it’s this performance that enables us to invest through the cycle within the ASP business and drives us to replicate its downstream success in the U.S.

Turning to the U.S. Our North American businesses saw a moderately softer performance in the first half of ’24, with an underlying EBIT of $417 million. This was driven by softer results at both North Star and Building and Coating products North America. At North Star, we saw softer spreads for the majority of the half on the back of the UAW strike. Pleasingly, there was a noted rebound at the end of the half following the strike’s resolution, and the period softness was also partially offset by higher volumes from the ongoing expansion ramp-up, which is progressing well. And at Buildings and Coated Products North America, the softer performance at the BlueScope Coated Products business, as Mark has mentioned earlier, combined with slightly lower margins in the Buildings and West Coast businesses.

Looking at activity levels across our North American end use segments. The key takeaway here is the economy in North America continues to perform at a better level than what was expected in the half, with nonresidential activity setting new records and automotive sales and manufacturing activity remaining resilient. Our Asian businesses continued their upward trajectory with an underlying EBIT of $96 million. A solid performance out of Southeast Asia on stronger margins, combined with the benefit of a favorable seasonality in China, along with continued strong performance in Thailand, more than offsetting softer India results as the Indian business integrates volumes from the recently signed supply agreement with Tata Steel.

On Slide 26, the New Zealand and Pacific Islands business delivered an underlying EBIT of $26 million. This result was impacted by elevated conversion costs, a softer vanadium contribution and softer steel prices in addition to softer volumes, particularly towards the end of the half. Turning to the group underlying EBIT movements. The first half to first half movement shows the volatility seen in both steel pricing and raw materials, which largely offset to see a step down in performance. Costs remained under pressure across the group, whilst volumes remained broadly stable. The second half to first half walk forward tells a broadly similar story, albeit with less volatility and a greater level of offset in the steel price and raw material costs.

Turning now to the financial framework and key financial indicators and settings. The financial framework remains unchanged and is integral to BlueScope’s success in managing the business through the cycle. You’ll all be familiar with this guiding document, but I would like to reiterate that we are holding a level of balance sheet capacity to derisk the large pipeline of capital investment for growth and major projects in the short to medium-term. The group delivered a return on invested capital of 13.4% over the past 12 months with robust contributions from North America and Asia. Importantly, this return was delivered on an increased invested capital level as we can — as we see earnings being delivered from the historical investments. Cash flows remained robust in the first half of ’24, however, were impacted by a slight working capital build and higher tax expenses.

Turning to our capital structure. The balance sheet remains strong with $614 million of net cash at the end of the half. We have ample liquidity of over $3 billion and have maintained our investment-grade ratings from both Moody’s and S&P. This clearly puts us in a position to invest appropriately in the business during periods of volatility and set the business up for long-term growth. On capital expenditure, in the first half of FY ’24, we continue to progress a range of foundation and growth initiatives, including the MCL7 project, the New Zealand EAF project and the Reline project, which you can see called out separately on the chart. In the second half of ’24, we’re expecting a slightly higher sustaining spend of around $240 million, with a step-up in spend on the range of projects Mark mentioned at the outset of the presentation.

Turning to shareholder returns. Aligned to the target annual dividend level of $0.50 per share, the Board today approved a $0.25 per share fully franked interim dividend. In addition, the Board has approved an increase in the scale of the buyback program to allow up to $400 million to be bought over the next 12 months. Given the number of shares bought back and canceled over the last 7 years, we will review the annual ordinary dividend target level in 2024. This will also consider the growth and resilience of BlueScope’s business over recent years and the medium-term macroeconomic and industry outlook.

Finally, I’ll run through the outlook across the regions before handing back to Mark to cover the group outlook. In Australia, we’re expecting a result less than half that of first half ’24 on weaker benchmark spreads and unfavorable pricing with similar levels of domestic demand. We’re guiding to a significantly higher result in North America. North Star is expected to deliver a result approaching double that of the first half of ’24 on stronger spreads, increased volume and lower conversion costs. And Building and Coated Products North America is set to deliver a result slightly below that of the first half of ’24 as elevated margins continue to unwind, partly offset by expected BPG project sales.

From our Asian businesses, we expect a result around 3/4 of the first half of ’24, driven by typical seasonality in China and stability in Southeast Asia and India. For the New Zealand and Pacific Islands, we expect the result approaching double that of the first half of ’24 on the nonrepeat of one-off higher conversion costs and higher domestic volumes. And finally, a nonrepeat of profit and stock benefit from the first half of ’24 is expected to lead to unfavorable intersegment corporate and group costs.

With that, I’ll hand back to Mark.

Mark Vassella

Thanks, David. Turning to the group outlook. Underlying EBIT for the second half of FY ’24 is expected to be in the range of $620 million to $690 million, slightly down on the first half of FY ’24. In the context of the spreads, you can see on the slide, this outlook, again, demonstrates the benefit of BlueScope’s diversified business model with weakness in ASP offset by strength in the U.S. Of course, our expectations are subject to spread, foreign exchange and market conditions.

So in summary, BlueScope remains a resilient business that’s well positioned to grow and deliver through the cycle. As I noted at the outset and throughout the presentation today, our diversified business model delivers quality through-cycle earnings enabled by our leading steelmaking businesses and a broad suite of margin-enhancing premium branded products. These quality earnings are underpinned by a footprint of quality assets, a strong balance sheet, our disciplined approach to managing capital and our outstanding people.

And it’s only going to get better for BlueScope with a range of attractive growth opportunities within our core business with a particular focus on continuing our shift towards premium branded products in Australia and New Zealand and leveraging our new growth platform in the U.S. And we remain steadfast in our work to secure a sustainable future for our business and the communities in which we operate in pursuit of our purpose.

So thanks for your time this morning. And with that, I’ll turn it over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Simon Thackray from Jefferies.

Simon Thackray

Just a quick one for you, Mark. Actually, way back when we talked about $1 billion to $1.1 billion of EBIT through-cycle. Now excluding midstream U.S.A. and other future projects, MCL7 and all the rest of it, what’s your — what’s the company’s view of sustainable through-cycle EBIT now given we’ve done North Star expansion, Coil Coatings and recycling M&A and obviously had pretty impressive share gains in value-add. How do you guys think about through-cycle EBIT at a level now?

Mark Vassella

Yes. Thank you, Simon. And yes, look, good question, mate. I mean from our perspective, part of the review, we’re going to go through with the dividend that we’ve signaled is there’s no doubt the mix in the business is changing, and we’re seeing more earnings, obviously coming out of the investments we’re making in North America. We’ve signaled further potential expansion there. And you should think about that in terms of the same internal hurdles that we’ve talked about a sort of 15% return on our invested capital. But there’s no doubt the mix is changing. Ironically, so is bottom of the cycle, who would have called the spreads that we’re seeing in the last 6 months, a decade ago either mate.

I thought it was as bad as it could ever get it about $180. And here we are seeing numbers that are crazy. So one of the nice things about the work that’s been done over the last 10 years is that we still got Australia printing profits notwithstanding those extraordinary spread levels. So look, I don’t want to give you a number, I’m sorry, because we’ve got some views, obviously, internally, but we’re doing a bunch of work on that now in terms of what is the new bottom of the cycle, what’s our mix look like as you — as we accumulate the earnings we’re making in the U.S. or the investments we’re making in the U.S. at those higher spread levels, it’s having a positive impact on what the through-cycle EBIT is for the business.

Simon Thackray

Sure. That’s still helpful. And then one for the pair of you, just net cash is $614 million, another $200 million loaded into the buyback, which will probably all be first half ’25, and — but also with your CapEx profile, you’ve got a pretty significant ramp-up coming over the next 12 months. All other things being equal, which they never seem to be in steel. Is it reasonable to think that the end of first half ’25 sees a pause in the buyback as capital is deployed more significantly for the projects, the MCL7, NZD EAF, blast furnace, et cetera?

Mark Vassella

Well, I mean, that’s the process we go through every 6 months, mate, and we’ve given ourselves another 12 months on this. We’re doing the review of the dividend. We’ll assess it at the next period and determine whether we do anything more about it. And as we’ve said in the past, I think one of the nice things about the buyback is it gives us the flexibility if the world changes for us to take the foot off the pedal. So that’s why we like the optionality that the buyback provides us.

Simon Thackray

Yes, no, fair enough. I’m going to sneak one quick one in, Mark. A lot of people have asked me, what was the rationale for the Australian government giving a $140 million grant for the blast furnace reline?

Mark Vassella

Well, that’s part of the safeguard mechanism mate. So as it was designed, that’s part of the safeguard mechanism. The government, I believe, felt that they needed to make a contribution to the future of steelmaking in Australia. So it’s not just Port Kembla, and that was the component that was allocated to us. So we’re very thankful for it. We think it’s a healthy contribution from the federal government. It’s — as you well know, it’s $140 million on a $1.15 billion investment. But yes, certainly, it was part of the safeguard mechanism as it was designed and put out by the Energy Minister.

Simon Thackray

Excellent.

Operator

Your next question comes from Lee Power from UBS.

Lee Power

Mark, maybe just on the domestic volume outlook for Australia. Can you give us a little color on that flat outlook? Like is that end market? Is it share gain? Are there any kind of meaningful changes in what you’re seeing from the contribution from either of those 2?

Mark Vassella

Yes, Lee. It’s a bit of a combination of all of the above, right? I mean, we’ve seen obviously some of those volumes come off as we’ve worked through the residential pipeline. Starts are at the bottom end of that historical range that we’ve talked about for years now sort of 90 to 130. We’ve seen some softness in some of the other segments. But then if you — quite frankly, it was always going to come. We were never going to have starts at the levels that they’re at that we’ve worked through. So fully expected from our perspective.

I think if you think about the underlying housing shortages in Australia, the growth of population and migration, any store or slowdown in housing starts, we think is temporary, and we’ll see that bounce back. But clearly, share growth pushing us into that higher-margin product is compensating for some of that softening that we’re seeing in volume. But I still feel okay about the Aussie economy. David, do you want to make a comment?

David Fallu

Yes. Well, I think as I mentioned, pleasingly, that we’re still sort of seeing it as a position of stability. As we sit here today, daily sales are at a consistent level to what they were last year. And I think that’s right. It’s reflecting both the volume that’s continuing, but also improvements in mix within the business.

Lee Power

Appreciate it. And then the Coated Products business in North America, the production and quality challenges. Like when — how long do you think you get that kind of business back to probably where it’s required to be?

Mark Vassella

Yes. So there’s a few moving parts here, Lee. I mean the transition handover from the prior owners was not great. It was late and not our fault, but it was late. So that took us probably an extra 6 months to get our hands on the tools inside the business. The foundation customer who was the former owner of the business has been underperforming in the market. So that supply agreement that we had with them, we’ve seen softer volumes from them in the market.

They’ve lost some share. I mean, coincidentally, that’s — or ironically, that’s gone to some of our share growth in BBNA. So there’s a bit of an offset there. But look, it’s just been a bit clunkier than we would have liked. As I said right from the start, this needed a bit more TLC than we expected. We’ve built the team. There’s a lot of capacity that’s been added to the team from a people perspective. And we’ve got now people in the — operating the assets that we’ve got confidence in.

In fact, we’ve just announced that Jeff Joldrichsen, who has run North Star for 20 years and been a senior operational person, the senior operational person there, many of you guys have met Jeff. He’s moving across to take on the operational role within BCP. So that’s a fantastic add to the team as well. So we’re working on it. It’s just a bit slower than we would have expected and there were some more surprises there than we had anticipated. But quite frankly, as we said right from the start, this is a medium- to long-term play.

We’re working right now on further trials of COLORBOND on the production facilities to test the product, which will have the results of in the next week or so. So in tandem with managing the day-to-day business, we’re continuing to work on that market entry, COLORBOND, single-bill strategy. So a bit softer from a day-to-day operational point of view, but no change in our confidence around the medium and longer-term strategy with those assets.

Lee Power

Yes. Yes, that makes perfect sense. And then maybe just a final one for David, the working cap like we’ve kind of swung from tailwinds to headwinds, like how — can you just maybe talk about the drivers and what we should be thinking in the second half?

David Fallu

Yes. So look, I think the – I mean bearing in mind, we’re coming off a pretty good working capital release the prior half, I just think with the elevation in raw material costs, the unwinds was a bit slower within this half. And then again, the performance of some of the more value-added products means that we’re continuing to hold a higher level to support that. But I would be – if we’re seeing – starting to see relief in raw material costs, that will be a material benefit not just to spread but also to the working capital levels that we’re holding in inventory.

Operator

Your next question comes from Rohan Gallagher from Jarden Group.

Rohan Gallagher

Mark, North Star. Could you — you deliberately slowed the CapEx expansion playing the longer game appropriately. Could you just talk about the profile of that, where that’s headed? And then also in relation to North Star, where the conversion costs, you saw a step change, part structural, part cyclical? How is the progress going associated with those conversion costs, please?

Mark Vassella

Sure. Rohan, I’ll let David talk to the cost. We’re still really comfortable with that ramp-up, the extra 320,000 tons. I was there just a couple of weeks ago. Team are doing a fantastic job with the ramp-up. And I think the pause that we put in place was appropriate. So I’m encouraged by what we’ve seen there. And they’re learning every single day of the week around how to schedule, how to run the asset, what the complications are, what the issues are when you’re running the 2 casters. What’s interesting from a debottlenecking point of view is that’s already started to highlight where the opportunities are for further capacity expansion, and they’re doing some pretty cool stuff around some heating options as the slabs exit the caster that improves the reliability and the shape of the bar going through the mill.

So it’s pretty interesting that how even in the ramp-up, they’ve now started to push into some of the debottlenecking tons. But yes, we made the right decision. It’s just given the team those couple of extra months, 2 months to 3 months just to step up. But again, the quality of the assets, the reliability of the assets, the capability of the assets, quite frankly, all beyond our expectations, which is — which augurs well for that continued ramp-up. So really comfortable with where they are from an operational point of view, from a cost perspective.

David Fallu

And just from a conversion cost, look, there has been some general inflationary impacts on things like gas consumables, but really probably the main call out there, Rohan, would be to some of the complexities that emerged in some of the disrupted raw material supply, particularly pig iron. And then I guess just as a final point, the increase is probably not a surprise in the CapEx. But if you look at the CapEx versus production benefit, it’s an incredibly attractive incremental spend.

Rohan Gallagher

Fantastic. And a follow-on to that, if I may. Obviously, leveraging the expanded North Star facility, which is industry-leading from a cost perspective, gives you that opportunity to value-add and almost replicate the Australian strategy. What are the milestones that you’re looking for as part of that potential $1.2 billion, $180 million EBIT opportunity over the next 5 years to 6 years?

Mark Vassella

Yes. Good question, Rohan. I mean, obviously, the financial hurdle is the first one we’ve got to get our heads around. So just understanding — and this what you’re seeing is a prefeasibility CapEx estimate. We’ve now moved into fees. So getting our heads around the return on that investment. It’s a little different this one because it’s a bit of a modular investment. You get a lump of the capital upfront because you’re putting down pickling and cold rolling and one metal coating line and then thinking about whether you expand to a second metal coating line or with the timing of that. So there’s a bit of front ending of the CapEx. So it makes the spend profile a little different.

But from our perspective, obviously, it’s getting over the hurdle of can we make the appropriate return on the sort of investment that we need to make. And then from a strategy point of view, as you rightly point out, I mean we’ve got a fabulous asset at North Star. If we were to push that to 3.5 million tons or 3.6 million tons with the debottlenecking, what’s the relative value of taking some of that and converting it through cold rolling, metal coating, putting it into BCP as opposed to finding a market for another 500,000 tons or 600,000 tons of hot band in that region. So that’s the end of play that we’re going through. We — we see from other parts of our portfolio, Rohan, that there’s additional value captured by stepping into that midstream component and processing and producing metal coated as part of the process.

But that’s what we’re going to test up and prove up in North America, remembering that, again, a part of this is that broader strategy that we’re putting in place around BCP entering the market with a packaged and branded offer. So they’re the sort of, I guess, finance hurdle, obviously, capturing the margin and market entry from BCP with branded and packaged offer are the key things that we’re thinking about in terms of that integration.

Operator

Your next question comes from Peter Steyn from Macquarie.

Peter Steyn

Mark, just a quick one, perhaps it’s for David. But in terms of your expectations for the U.S. steel market over the next couple of months, it does look like your spread assumptions for the second half would factor in a reasonable amount of further degradation in the spot steel prices. Could you comment on that and sort of perhaps broadly give us your sense of what the lay of the land is? You commented on economic conditions, obviously, being a little bit better, but we’ve seen a very rapid sudden adjustment in steel prices. So curious how you think the industry reacts.

David Fallu

Yes. Look, I think just in terms of your commentary, the — we incorporated within that view, obviously, is the lagged impact on outlook. And so at the start of the half, we’re obviously incorporating a view that we continue to receive the benefit of that. And then as we move further out, we’re incorporating that view of lower spreads, albeit we’re still seeing that settling above the historic middle of the cycle level that we’ve seen there. Probably the main comment I’d make in terms of observation would be that the consolidation in the industry has meant we’ve seen continued discipline on the supply side. I think probably what has changed is particularly the impact through the distributor networks where they’ve been faced with a lot of volatility.

And as a result, you see them sort of stepping out of the market at higher levels and rebuilding inventory at lower levels, and that’s a dynamic that we’re continuing to see, Peter. So I suspect that volatility is something that we’ll continue to see through the course of the second half.

Peter Steyn

That’s useful additional color. Sorry, there’s been a lot made of the coated product strategy. But I’m just curious on the commercial side, Mark, what you’re seeing from customers in terms of acceptance of single-bill and your intentions with COLORBOND, some of your test marketing. Could you give us just a little bit of commercial insight there?

Mark Vassella

Yes. We’re seeing it take hold, Pete. So some of the other players in the market have pushed into particularly steel dynamics are pushing into the single-bill offer, and we’re seeing that volume grow. Of course, the single-bill offer is what we run on the West Coast anyway with Steelscape. So we have our own controlled experiment, if you like, on the West Coast, and that’s been successful for many years for us. And as we start and think about some of the commercial issues that we’re seeing, encouragingly, Pete, we think there’s growth in residential roofing, particularly in the premium end, which is interesting for us.

It’s very hard for us to compete at the low cost end against the asphalt shingle dominant product, but we’re seeing certainly from our market work and opportunity for us to push into the more premium and from a residential perspective. And of course, that’s right in our sweet spot, if you think about what we do with COLORBOND here in Australia. So that’s one of the — that is one of the commercial indicators that makes us interested. And of course, the scale of the market, one of the statistics that came out of the market research is a 1% improvement in market share for residential housing in North America is 100,000 tons. So as you look at that little check box of capacity add that we’re talking about a 1% movement can use 50% of the capacity of a line.

So it’s a bit extraordinary from that point of view. It’s a different approach for us from where we are in Australia. And that’s what’s giving us the confidence to think about can we push into this market and can we grow and add the product — add products like COLORBOND to the market, particularly in that premium end and get the same sort of benefits that we find in other markets. So that’s the way we’re thinking about it commercially, Pete.

Peter Steyn

Perfect. If I may just sneak one last one. Just in terms of your property portfolio, you’ve used a few spotlights today. What’s sort of the next steps we could expect out of your property development or property value unlock strategy? And what’s the approximate timing of those?

Mark Vassella

Yes. Look, this is — as we’ve said, this is a multi-decade approach because what we’re cognizant of here is this needs to be completely aligned with the operating assets. It’s not like we’re leaving any of these facilities, and we can sell it off and move away quite — apart from the West Dapto facility quite frankly. I mean that was a piece of land that was bought a long time ago by BHP for a potential expansion of the steelworks and further addition of capacity. So that’s a stand-alone piece of land that’s got its own opportunities, the pieces of land that surround our facilities.

We’re going to be very cognizant of ensuring that we think about value opportunities that are aligned with what we do, and that’s also, I think, quite interesting and very prospective for us. But this is going to be a multi-decade process. We’re thinking about how we structure it. You’ll see us put in place a structure where it will be managed from the center, probably an ELT position someone to look at this. We need to bring some capability in-house, Pete. This is not our expertise. We recognize that. So we need to bring some capability in-house to help us manage this because it’s a large parcel of land and a large opportunity. I don’t want the businesses distracted by it on a day-to-day basis.

So we’ll pull it out of the businesses and run it centrally and give it to someone who’s got expertise in this space or a small group of people who’ve got expertise in this space. So we’ll keep you informed, but it’s not something that’s going to happen next month or the month after this, as I say, multi-decade, but a significant value opportunity, I think for BlueScope to think about potentially having a property division as part of the BlueScope portfolio.

Peter Steyn

Yes. Got you. We haven’t seen that before.

David Fallu

Peter, it probably gives you a pretty good idea of what the next steps are there.

Operator

Your next question comes from Paul Young from Goldman Sachs.

Paul Young

Yes. Mark, thanks for providing the CapEx for the potential sort of midstream and downstream investment in the U.S., but that USD 1.2 billion is probably a little higher than that I thought it might be. And also the timing of the 7 years is quite a long duration. Just curious around your thoughts around the timing of that investment. Would it be time to coincide with the CapEx rolling off from Port Kembla and also time with respect to fully getting on top of Coil Coatings before you made the investment? Or is it also that time frame and you put out the 7 years sort of coincide with potentially looking at acquisitions in the U.S.?

Mark Vassella

Yes, Paul. So I mean, I just — you think about these assets, I mean, they’re not easy to get on top of in terms of planning and approvals and the work we need to go through to make sure that we get it right. So I wish I could claim that it was as well coordinated as finishing the blast furnace and starting this. But that’s probably how it’s going to run just because of the planning work that we need to do with this. So it takes us a year or 18 months to get to a point where we’re confident to start and spend money on an asset like this, then it’s a couple of years, 2 years to 3 years for the assets to be manufactured and installed and commissioned.

So even if you think about MCL7 in Western Sydney, that’s a multiyear project. So just by dent of the sorts of projects that they are and the complexity that they have, they take several years to roll out. And this would be incremental in terms of pickle line cold rolling mill, first metal coating line. I didn’t want to take on the risk or didn’t think it was necessary for us to take on the risk of trying to do both metal coating lines at once. That’s a big ask. And as you point out, I mean, given some of the moves that are going on in North America, some of the options that we have there that we don’t necessarily have in Australia, who knows. I mean Stage 2 of this process might not necessarily be a build.

It might be the potential for us to pick up an asset from somewhere else if someone has an asset that they think is surplus to their needs. So this staged approach allows us to get on top of BCP, get the market entry strategy for single-bill and COLORBOND right, start and grow the capacity, build into it with the first line, but keep the options open as we go down the track. So that is how we’re thinking about it, Paul.

Paul Young

And then listen, I have to dig into Coil Coatings, it’s a little bit, to be honest, because you just said that took you 6 months longer to get the keys, if I heard that correctly. And we’re seeing [Precoat] sell everything they’re producing and actually deleveraging and actually printing good margins and steel dynamics about to commission over 400,000 tons of painted steel and to your point, under a single-bill offering. So with Coil Coatings, I know you bought it below replacement value, but it hasn’t — and I know you’ve only had it for 18 months, but it’s not really delivering. So I’m just curious around how many years you think it’ll take it to turn around? And when can you actually tell us a sort of a fixed plan, Mark, about how you actually lift utilization and improve returns of this business?

Mark Vassella

Well, I mean, I think there’s the 2 pieces that you’ve combined there. Steel dynamics are about to put a 400,000 ton line on. We’ve got 500,000 tons of capacity and another 500,000 tons of capacity sitting there ready to go. So that’s the very work we’re doing right now in terms of how we improve the performance of that business. It’s slower than we would have liked, which we’ve acknowledged, and I’m not happy to call out, but I wanted to call out because we tend to tell you guys when we don’t do things as well as we would have liked, that’s just the way we roll.

So from that perspective, it’s not performing where — to where it needs to be. But I’m really confident the plan that’s in place now, and we’re starting to see the business grow outside of our foundation customer. As I touched on our foundation customer hasn’t been performing at the levels that we expected, but we’re seeing growth outside of that. So we’re already starting to see that happen, Paul. And I’m very confident that we’ll continue to see that grow. And then we’ve got installed capacity there right now, which we’ve got the ability to take advantage of. So it’s not going to be years for us to get this asset up and running. It’s really a matter of it’s just getting on top of the issues that we’ve had to deal with over the last 12 months or so, and I’m confident now that we’ve got control of it and we can start and — we can start and get on top of that.

Paul Young

Okay, great. That’s good news.

David Fallu

And Paul, maybe just to emphasize, I know we spent a lot of the time on the call focusing on the material opportunity of the support for a COLORBOND launch in North America. But kind of make no mistake, there is an absolute priority on addressing the underlying performance within the coated business as it currently exists today.

Mark Vassella

Yes.

Paul Young

Look forward to tracking its progress.

Mark Vassella

Thanks, Paul.

Operator

Your next question comes from Lyndon Fagan from JPMorgan.

Lyndon Fagan

First one is just on North Star. Mark, wondering if you can give us a sense of roughly when you think this thing could be at 3.5 million tons. Just trying to get a better idea on the speed at which you can debottleneck and get that extra [500,000 tons]?

Mark Vassella

Yes. Yes. Well, we’re madly getting towards 3 million tons right now. And as you saw there, Lyndon, we got 320,000 tons in the first half of extra product, and we expect that’s obviously going to build in the second half as well. The work I saw from the team when I was there just a couple of weeks ago on the debottlenecking, as we’ve said right from the get go, this is not a one-step capital project. There’s incremental components. We’re looking at induction heating off the casters, which we think will give us a step-up in capacity. We already ordered new cranes for the ladle aisle because the dear old cranes that are there was 60 years old and now become a bottleneck for us in terms of heat treating in the ladle aisle.

So they are the long lead time items that we’ve already ordered. The engineering work has started for a third down coiler. That’s not a simple process because we’re effectively cutting into the mill structure itself and adding a third down coiler. You guys remember from being there, there’s currently 2, so we’re talking about adding a third one. So this is incremental CapEx and project work that will happen over the next — look, I would say the next year to 2 years is we’ll build up as we do each of these individual projects. And for each project, there’ll be an incremental bump in volume that will come from that. So we’ll build to that 500,000 tons, Lyndon. So I think we’ve said June for full run rate of the Aristotle or the expansion volume, and I’m comfortable with that.

We’ve already got some assets ordered and started thinking about technology and engineering and design for the next step, particularly probably around induction heating will be the next cab off the rank. And then the team will think about what is the next best alternative for volume and CapEx and business interruption. So that’s the process we go through, but it’s probably sort of 1 to 3 years, I guess, will be the time frame as we incrementally do one of those projects. You don’t want to be — as you guys know, from North Star, downtime is precious, and it’s about scheduling the work that we need to do to make sure that we get them done without disrupting the mill or the ongoing business model as well.

Lyndon Fagan

So it sounds like in FY ’27, FY ’28 type time frame, you…

Mark Vassella

I think, yes, sort of 1 to 3 years, what are we now, 2024, yes. So that’s kind of the right time frame the way I’d be thinking about it, yes.

Lyndon Fagan

Great. Thanks.

Mark Vassella

I mean, to David’s earlier point, the capital efficiency of this expansion is such that we’re going to be doing as fast as we possibly can, Lyndon. We’re not sitting back waiting for this stuff to happen. It’s all about how quickly can we do it, how much risk do we take on. We don’t want to muck up the business model, but the capital efficiency of this expansion is such that we want to do it as quickly as we possibly can.

Lyndon Fagan

Got it. Yes. No, that’s good color. The other question I had was just to push a little further on the property value unlock. How should we think about the potential proceeds and the materiality to BlueScope? But obviously, it looks like a lot of land there. I mean should we be attributing some sort of dollar value to the excess? I’m just wondering if you can help us quantify the potential benefit.

David Fallu

So look, there’s clearly a value of that land as it sits there today, right, for 1,200 hectares. And the work we’re going through is what we can do, what are the barriers to increasing the value of that land and what can we do that doesn’t cause sort of interruptions to our site. So you can imagine any progressive rehabilitation requirements, rezoning or planning that we need to do, that’s the work that we’ll be doing in parallel. But quite clearly, it’s a substantial asset that’s of value and should only increase from here.

Mark Vassella

I think, Lyndon, we’re early stages on this. But from our perspective, it’s not a matter, as I said earlier, just apart from probably West Dapto, which is stand-alone. So it comes with its own opportunities and issues that we’re going to work through. But this is not just necessarily about flogging off pieces of land. This is about what’s the highest and best use for us in terms of our ongoing business operations, adjacencies, do we lease, do we develop, do we sell some? The answer is yet to be determined, but it’s all of those things.

I mean we’ve signed the MOU with the TAFE in New South Wales. I think that’s a fantastic opportunity for us to bring a foundation tenant onto our site. So there will be a range of opportunities here. Everything from sale through to development and lease that I think will emerge as we go. That’s the work we’ve got to get after.

Operator

Your next question comes from Daniel Kang from CLSA Australia.

Mark Vassella

You’re there, Dan? Hello? You are on mute, Dan?

Operator

Pardon me. Daniel, your line is now live.

Daniel Kang

Sorry about that. Just wanted to discuss, I guess, a little bit more on U.S. HRC spreads, which we’ve seen a bit of a pullback. Sentiment is a little bit soft. Just interested in what you’re seeing at your own customer inventory levels, any signs as yet of when the market may start to settle.

David Fallu

Yes. So look, I think what you’ve seen, as I said, is there’s a — through that, there was a bit of force buying at some fairly challenging spread levels for customers. They’ve been working through that inventory as they’ve seen weakness in pricing moving forward, and we’re seeing them reenter the market at current levels to rebuild that inventory. As I said, I think that will be a feature as we work through that volatile pricing. But the pleasing thing for me is we are seeing that settling at higher than previous mid-cycle spread levels. So I think that the market itself remains attractive. North Star itself is not having trouble placing those tons. So from a sales perspective, they’re still able to fully allocate their production as we continue to steadily increase volumes.

Daniel Kang

Just swing over to Asia, HRC spreads are still looking very weak and not enough signs as I can see of much improvement in the near term. And your Slide 22 suggests that Australian steelmaking is now in cash losses. I guess my question is, strategically, can you talk us through how management is viewing this position, potential cost levers that you may have, particularly if these levels are sustained for a while?

Mark Vassella

Yes. So look, Dan, I think what’s encouraging is, as we’ve demonstrated on from whatever slide it is, steelmaking’s relative cost position has been really quite stable through what’s been a pretty inflationary period. So the team at Port Kembla have done a fabulous job to maintain the focus from that point of view. We’ve seen cost increases, but we’ve added a whole bunch of value-add products in that as David talked about as we went through the presentation. We’ve said to you guys before, I mean we see the value shift inside the integrated chain go from the front end to the downstream end and our strategy over the last 10 years or so of having that steelmaking business as low cost as it can be, but pushing and growing our premium branded products and increasing our margins is for exactly this point in time.

Tania and her team are working very hard on costs day in, day out. That’s what that business does. That’s why it’s survived. It’s why it’s continued to prosper. But there are some challenges. There’s no doubt about it. And inflationary pressures, electricity, gas costs, there are some pressures, but that’s the work the team do. I’m still really pleased to see the outlook for that business, notwithstanding these spread levels. And historically, we haven’t seen spread levels like this lasted very long. They’ve lasted longer than we would have expected. People are coming back from Chinese New Year. It will be interesting to see if anything emerges out of China over the next little bit, whether it’s a supply side adjustment or a price side adjustment. But certainly, we need something to happen out of China for them to improve, but we certainly can – we can deal with what we’re dealing with.

It’s not where we want to be, but ”e ca’ deal with what we’re dealing with, and we know how to pull the levers we need to. We’ve done it in the past, and we’ll do it again. So from that point of view, I’m really confident of where Port Kembla is and what the team are doing there to make sure that we’re doing all the right things.

Operator

Your next question comes from Paul McTaggart from Citigroup.

Paul McTaggart

So look, it’s hard to imagine that you wouldn’t do the hot metal — sorry, the rolling expansion at North Star, given you’ve got hot metal capacity. And then likewise, you don’t want to be a toll painter. So it makes sense to have cold rolled and metallic coating feed your painting operations. So it kind of seems to be inevitable that you’ll do the $1.2 billion spend plus the incremental hot metal. How — what sense is it now to talk about a debt target of $400 million, given that — I mean, for a while, we kind of — it feels like we’re going to be running a conservative balance sheet for multiple years just because there’s so much in your plate. And that’s not a bad thing, but I’m just wondering the relevance of the $400 million.

David Fallu

Yes. Look, I think it still remains relevant, right? Bearing in mind that probably means that we’ll be working towards maintaining our flexibility through this period, I think both because of the volatility in the environment and the significant progress — projects we want to work through. But the reality is that we still feel that target remains a sensible target given the operating leverage we have. We want to make sure that we’re not overlaying too much financial leverage. And just for clarity, that’s — that incorporates our leases number as well. So from a net debt perspective, sort of thinking about that as effectively a neutral balance sheet.

Paul McTaggart

And maybe one last question. We touched earlier on about kind of COLORBOND kind of push into the U.S., but have you thought about kind of an initial marketing kind of effort, what markets and segments of the market you’re going to target? Just trying to get a sense of how that might evolve over time?

Mark Vassella

Yes, yes, yes, Paul, there’s a bunch of work being done on that. I mean we already export some COLORBOND into the U.S. I mean you’d be aware of that, that we’ve got a couple of customers there that have been promoting the product for some time as an export product. What we’re trying to do, obviously, is build that local capacity and grow that market. But yes, we’ve been thinking about where do we target it? Is it more regional top tier versus second or third tier roll-formers? Again, as I touched on earlier, I think a really interesting emerging residential opportunity for us.

So that’s the market entry work that’s well underway. So yes, we have a market entry strategy that has been pulled together, and that is what we’ll implement. I mean I don’t have much more detail for you than that. But they’re the — they’re certainly the opportunities in the segments of the areas that we think we can penetrate with a branded packaged and a branded product.

Paul McTaggart

And maybe if I can really be cheeky, chuck a last one in. Did you not have a offtake agreement with your founder customer or key customers for — when you sold or when you bought into the coating business? Was there not kind of a requirement for that customer or for that vendor to take minimum tonnage? And do you have any comeback? That’s my question really.

Mark Vassella

Yes.

Paul McTaggart

What remedies do you have?

Mark Vassella

Yes, no, we had an offtake agreement, but it wasn’t a guaranteed minimum. It was an offtake of their volume, and they’ve been losing some volume in the marketplace, which is why it’s been a bit softer for us. So it wasn’t a take or pay. It was — but it was an agreement around continued support for the business. And we’ve seen them cycle off a bit, Paul. So that’s what’s happened. We didn’t — it wasn’t a take or pay.

Operator

Your next question comes from Chen Jiang from Bank of America.

Chen Jiang

A few follow-ups from me, please. So firstly, on ASP. I’m just wondering for the raw materials used in Australia, with the premium hard coking coal price remain above USD 300 and probably will remain elevated in the next few years. Does your blast furnace has the capability or do you have any plan to blend different quality of coal, such as PCI or lower quality or hard coking coal to reduce your raw material costs?

Mark Vassella

So Chen, we use PCI now. So that’s part of the process. We — we’ve got a very sophisticated value-in-use model that we operate through the blast furnace, where we look at what the right mix is for the furnace. The coal we get out of the Illawarra, I would say to you is very high quality from a structural point of view. It works for us from an operational perspective. So that sort of value-in-use model is something that we put in place and manage through the business. But we do use other raw materials from time to time, but that’s a discussion and a conversation that goes on in the business on a daily basis. It’s hard to run a high-quality blast furnace with really crappy raw materials, right?

Chen Jiang

Yes. Yes. Yes.

Mark Vassella

So that’s a bit of a slippery slope. So from our point of view, we manage that quite tightly.

Chen Jiang

Sure. Sure. Just to clarify. So at the moment, you are using the PCI coal from Illawarra with roughly speaking raw material cost for coal, such as the PCI benchmark nor the premium hard coking coal price.

Mark Vassella

Yes. Yes. Yes. We use PCI coal. correct.

Chen Jiang

Okay. All right. And then another follow-up just on the realized product on the Australia steel products. In the presentation, you mentioned unfavorable realized price. I’m just wondering, I guess, COLORBOND remains at a robust level for volume and pricing, what is the realized pricing unfavorable? Is that for Coated Products? And then what are the reasons for that?

David Fallu

Yes. So that’s — when we’re looking at it the opportunity to gain premium pricing during periods of supply chain constraint as obviously less opportunity for that moving forward in the current half, as we’ve seen sort of the improvements in the balance of supply chains around the region. So it’s more a reflection probably across the non-premium branded aspects of the portfolio rather than the premium branded areas of the portfolio.

Chen Jiang

Right. So less premium product sales versus nonpremium?

David Fallu

Yes. The value-add of the domestic supply chain is a little bit less when the supply chain is not constrained.

Chen Jiang

Right. And then maybe last question on your North America coating business. You mentioned in the call various reasons left from the previous owners that you have to fix after you acquired the business. And also in the presentation, you mentioned the quality challenges and the impacts of production. I’m just wondering what kind of plans or strategy you have put in place to fix that. So the quality challenges and the production impact that won’t repeat again in this half or in the next few years?

Mark Vassella

Yes, Chen. So we’ve — we’re throwing a whole bunch of resources at this. So I mentioned earlier, we’ve now got Jeff heading up operations. We took one of our senior guys out of North Star to run one of the big facilities, one of Tania’s team in Australia, Simon Took, who many of you will have met on tours of Port Kembla. Simon is working on the COLORBOND strategy in North America. The local marketing team here have been working with the marketing — adding to the marketing resources where we’ve just recruited a senior market — or not just, but recently recruited a senior marketing resource.

So Chen, we’re doing a whole bunch of work around not only capital investments and operational improvement within the businesses, within the operations, but also adding to the capability from a management perspective as well. So Kristie and her team have populated that team. It was well under done, everything from sales resources right through to senior leadership roles. So we’ve been populating that team over the last little while. So there’s a range of efforts and strategies going into turning that business around obviously.

Chen Jiang

Sure, sure. Do you have a time line, like a targeted time line for the full integration and then margin expansion we are going to say? Is that like a more like FY ’25 or FY ’26 story?

Mark Vassella

How does tomorrow sound? And the business keeps telling me they’re working as hard as they can, but I kept telling them tomorrow, Chen. So that’s my time line. And that’s what – we’re going to get this done as quickly as we can.

Operator

Thank you. There are no further questions at this time. I’ll now hand back to Mr. Vassella for closing remarks.

Mark Vassella

Great. Thank you. Look, thanks, guys. I know it’s a busy time and lots of announcements today. So thank you for carving out some of your time to talk to us, and we look forward to talking to you over the next week or so. Take care. Thank you.